GEITHNER MEETS THE PRESS… President Obama sat down with Bob Schieffer on Face the Nation today, but I was actually more interested in Timothy Geithner’s back-to-back appearances on Meet The Press and This Week With George Stephanopoulos. These were his first two appearances on the Sunday shows, coming out of a week where he announced major initiatives to engage in a public-private partnership to buy up toxic assets, and to re-regulate the financial sector. Both interviews had some interesting moments.
On both shows, Geithner was asked about the potential flaw in the plan for toxic assets, that the banks simply won’t sell at the prices set by private investors, because taking losses would reveal the banks to be insolvent. Geithner didn’t have the best answer for this other than to urge the banks to “take risk again.” Indeed, there is no mechanism to force the banks to sell. In addition, on the issue of counter-party payments from AIG, Geithner demurred at any potential efforts to recover money from Goldman Sachs and other banks who were paid out whole on their credit default swaps instead of being forced to negotiate, pivoting instead to the need for more tools to step in and take over a firm like AIG:
GEITHNER: George, we came into this crisis as a country without the tools necessary to contain the damage of a financial crisis like this. In a case of a large, complex institution like AIG, the government has no ability, had no meaningful ability to come in early to help contain the fire, contain the damage, prevent the spread of that fire. Restructure the firm, change contracts where necessary, and helped make sure that the financial system gets through this…
STEPHANOPOULOS: But it would have been the right thing to do, right?
GEITHNER: If we had the legal authority, that’s what we would have done. But without that legal authority, we had no good choices. We were caught between these terrible choices of letting Lehman fail — and you saw the catastrophic damage that caused to the financial system — or coming in and putting huge amounts of taxpayer dollars at risk, like we did at AIG, to keep the thing going, unwind it slowly at less damage to the ultimate economy and taxpayer.
STEPHANOPOULOS: So how about now, Goldman Sachs is taking other government money. They got this $13 billion whole from AIG. Congressman Brad Sherman and others have said, they should give that $13 billion back.
GEITHNER: George, the important thing is, we have no legal ability now. That’s why I went to Congress last week, to propose a broad change in resolution authority so that we have the capacity to do what we do with banks now.
I suspect that will be a less-than-satisfying answer to most people. Basically Geithner is trying to keep the past in the past, particularly with respect to AIG.
On some other fronts, however, Geithner displayed a definite concern to reel in the massive financial sector and build a broad-based economy that can better manage systemic risk. Here is an answer from Meet the Press on his regulatory proposals:
SEC’Y GEITHNER: Core thing is to make sure that the institutions at the center of our financial system are subject to much more conservative, much tougher requirements on capital and leverage that are applied more evenly and more effectively, frankly. We need to make sure that hedge funds and derivatives come within a framework of oversight so we protect the system from the risks they may present. And we need to make sure the government has the authority it needs to come in more quickly, to help contain the damage, restructure the system, so we can have a stronger system going forward […] We need a better model. What we’re proposing to do is use a model that exists for small banks that was designed by the Congress in the wake of the S&L crisis, build on that model and give the government a capacity to act more quickly, more effectively to contain the damage at least risk to the taxpayer and the economy as a whole.
Certainly, over-leveraging caused a good deal of this crisis; other countries where the banks are leveraged more conservatively are in better shape. Obviously, the devil is in the details – there are currently no capital requirements for hedge funds in the Geithner proposal, for example, and the real issue is whether the regulation will be strictly enforced. Our experience with bank regulators who are too cozy with the subjects they regulate recently suggest that the real problem is a lack of will.
But I thought Geithner’s willingness to talk about the need to restructure the American economy, at the macro and the micro level, was interesting.
MR. GREGORY: Time magazine this week has its cover, and it’s very interesting. I want to put it up on the screen for our viewers to see. “The End of Excess: Why the crisis is good for America.” And there’s a big red “reset” button. And everybody talks about reset. Obviously this is not a good crisis for America right now. But take a longer view. In the long run, is this crisis necessary for this economy?
SEC’Y GEITHNER: I think the adjustment to a period of excess is necessary. You never, you never want to have a crisis to remind people of the importance of living within your means, not borrowing too much or why regulation of the…(unintelligible)…is important. You never want to have a crisis that’s damaging to make that point. But we’re going to emerge stronger than this. When we get through this people are going to care less about what they make, more about what they do, what they achieve with what they make, and that will help make this country stronger.
MR. GREGORY: Will the economy be fundamentally different? Will people own fewer homes? I mean, home ownership, will that go down? Will consumption change? Will our lives change in a meaningful way?
SEC’Y GEITHNER: I think people will be living within their means more, which is helpful. We want to have, you know, a stronger, more sustainable recovery. Not a recovery based on a artificial boom that’s not going to be sustained. We need to end this, this, this pattern of having booms and busts at the kind of frequency we’ve seen. That has to change. And that’ll make the, that’ll make this a better place to live and a more productive economy going forward.
Further, Geithner understands the importance of active engagement with the crisis, not to ease up on the pedal because of a few positive indicators. And he talks about the need for a broader segment of society to share in the benefits of recovery than the wide gap between the rich and poor we’ve seen explode in the past decade.
GEITHNER: Now, the important thing, though, is that we keep at it. You know, the big mistake governments make in recessions is they put the brakes on too early.
STEPHANOPOULOS: Is that what happened during the depression? Is that what Franklin Roosevelt did?
GEITHNER: That’s one thing that happened in the depression. It’s happened in Japan, too. It’s happened in a lot of countries in the world. They see that first glimmer of light, and the impetus to policy fades and people are putting on the brakes, and we’re not going to do that.
STEPHANOPOULOS: So income inequality goes down?
GEITHNER: It should go down. Again, you know, if you look at the record of performance in the ’90s, you know, we had very strong productivity growth during a period of fiscal discipline, fiscal responsibility, strong private investment, and the gains were shared much more broadly.
We can do that as a country, but it requires getting this government to do a better job of doing things only governments can do. That’s why I assume important we get better outcomes. That’s why fixing our health care system and get costs growing more slowly is so important. That’s why we need a better energy policy. And that’s why infrastructure needs to be improved.
This mirrors what the President has been saying about sustainable growth rather than feeding into the same boom-and-bust cycles and propping up the same elites who took these tremendous gambles. Or in the words of Joe Biden – “We need to save markets from free marketeers.”
Obviously, words are less important than actions. But this perspective can hopefully guide the Administration through this crisis, and provide the kind of investments needed to ensure that everyone has the opportunity to share in the recovery. I’m not convinced that Geithner is the best advocate for reducing inequality and stopping the casino on Wall Street, so from the outside the work continues to keep pushing for a newer, safer, more durable economy.